Europe’s Airlines Overcome Uncertainty

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LONDON – Despite Europe’s bumpy economy, the continent’s airlines are surprisingly healthy, with no-frills Ryanair handing Boeing its biggest order of the year while some of the long-ailing national carriers are returning to health.

 

The sector is generally very vulnerable to economic hiccups but even with Europe’s hard times dragging on, passenger numbers have stayed surprisingly strong, said Amir Sharif, an operations management professor at Brunel Business School in London.

 

“There’s still strong passenger demand; people still want to travel,” he said. “Cargo demand seems to also be somewhat there as well,” meaning that despite high fuel prices, cashflow is reasonably healthy.

 

While some national airlines, notably Italy’s Alitalia, are struggling with losses, others are turning in their strongest performances in years. Consolidation has brought discipline and cost-cutting to the sector, analysts say.

 

The merger of British Airways and Spain’s Iberia, which formed the International Airlines Group (IAG), has been hard on workers, but good for the bottom line. In a report last month entitled “Reasons for Optimism Multiplying,” analysts at Credit Suisse credited IAG’s improved outlook in part to Iberia’s tough stance with labor unions, which is expected to result in job cuts, pay reductions and increased productivity.

 

“We continue to think Iberia can limit its operating loss to €100 million ($128 million) underlying” in 2013, down by two-thirds from the year before, the report said. The group is also benefitting from an alliance with American Airlines, which has helped push revenues on lucrative trans-Atlantic routes up by 23 percent, according to Credit Suisse.

 

KLM and Air France, which merged in 2004, are also reorganizing and reducing staff to cut costs, particularly at loss-making Air France.  Germany’s Lufthansa is the strongest of the national carriers, Credit Suisse analysts said in “European Airlines: This Time May Just be Different,” a research note released earlier this year.

 

“In our view, 2013 will prove a crucial year for investors to judge the likelihood of success of respective flag carrier restructuring efforts,” the note said. “The big question is whether the early steps taken so far can produce structurally enhanced earnings.”

 

Even stronger than the large, legacy airlines are the so-called low-cost carriers such as Ryanair, which in March signed a deal with Boeing for 175 737-800s, the manufacturer’s next-generation, narrow-body plane. Dublin-based Ryanair said the order, to be filled by the end of 2018, would bring its fleet to a total of 400 aircraft, and provide capacity to carry 100 million passengers around Europe each year.

 

The airline said its order, which had a list price of $15.6 billion, but likely came with a big discount, was the largest ever from a European carrier.

 

With the European airline market nearly saturated, Ryanair will have to think carefully about where to deploy its new planes, said Chikage Miyoshi, a lecturer in the Department of Air Transport at Cranfield University, north of London.

 

The airline has done well by sticking to its original no-frills business model, gaining additional revenue from the fees it charges for extras such as priority boarding and reserved seats, Miyoshi said. Ryanair’s British-based competitor, easyJet, is also expanding, having announced recently that it would hire 200 new pilots in 2014, on top of 330 planned for this year.

 

The low-cost carriers and traditional airlines do not necessarily undercut one another, Sharif said. They fill different functions, with the national airlines offering connections to longer-haul flights, while Ryanair, easyJet and others like them stick to single-leg journeys in and around Europe.

 

“We are talking about two different beasts in a very dynamic jungle,” Mr. Sharif said. “Those two beasts can exist separately, and they can co-exist.”

 

A bigger challenge to the crowded European market, and in particular for the region’s national carriers, is coming from Middle Eastern carriers like Etihad Airways and Emirates, which are grabbing market share in the region and using their bases in the United Arab Emirates as hubs for connections to Asia and beyond. Emirates just announced a partnership with Qantas, which the Australian carrier hopes will help pull its international operations out of the red.

 

“It’s really a threat for the European network carriers,” Ms. Miyoshi said of the push from the Middle East.

 

Mr. Sharif said inter-airline alliances are increasingly important and he believes carriers also will seek to differentiate themselves from one another by focusing on improving the customer experience.

 

Photo courtesy of Flicker — happyrelm

 

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